HFFX LLP & Ors. v The Commissioners for HMRC
[2023] UKUT 73 (TCC)
Simon Hackett & Anor v The Commissioners for HMRC
15 August 2024
[2024] UKFTT 749 (TC)
First-tier Tribunal
Two brothers got money back from banks for mis-sold financial products. The tax man said the money was taxable because it replaced business expenses the brothers had already deducted from their taxes. The court agreed with the tax man, saying the brothers had to pay tax on the money they received back.
Key Facts
- •The Hacketts appealed closure notices assessing income tax on basic redress payments and interest received from HSBC and RBS for mis-sold interest rate hedging products (IRHPs).
- •The IRHPs were complex products used to manage interest rate fluctuations on loans.
- •The FCA investigated mis-selling of IRHPs and established a review process including redress payments.
- •HSBC calculated redress based on the difference between actual and hypothetical payments on alternative products.
- •The Hacketts received approximately £927,865.71 as basic redress and £270,736.12 as interest from HSBC, and £65,173.76 interest from RBS.
- •The Hacketts argued that the payments were for opportunity cost, not compensation for expenses, and thus not taxable.
- •HMRC argued that the payments were compensation for deductible expenses and therefore taxable.
Legal Principles
Compensation for expenses deducted in calculating business profits is taxable income.
London & Thames Haven Oil Wharves Ltd v Attwooll, Donald Fisher (Ealing) Limited v Spencer, Deeny
To characterize a payment, first identify what the compensation was paid for; the source of the legal right is relevant to this identification.
London & Thames Haven Oil Wharves Ltd v Attwooll
Interest is chargeable to income tax if it compensates for the time value of money, is due to the recipient, and is calculated on a sum of money due to the recipient.
Riches v Westminster Bank Ltd, Re Euro Hotels (Belgravia) Limited, Chevron Petroleum (UK) Ltd
The court should apply the language of the statute without adding glosses or addenda.
Deeny
Outcomes
The appeals were dismissed.
The Tribunal found that the basic redress payments were compensation for deductible business expenses, and the interest payments were taxable under section 369 ITTOIA.